Investing in the Junkiest of the Junk.

The world is filled with many debt rating services। We are going to look at one in relation to bond investments। Below is the Standard and Poor’s (S&P) rated area known as Non-Investment Grade or Junk Bonds। S&P rates borrowers on a scale from AAA to D. Intermediate ratings are offered at each level between AA and CCC (e.g., BBB+, BBB and BBB-). For some borrowers, S&P may also offer guidance (termed a "credit watch") as to whether it is likely to be upgraded (positive), downgraded (negative) or uncertain (neutral). If you looked at the bond details in the online brokerage website, you may have come across bonds on Credit Watch.

• BB : more prone to changes in the economy
• B : financial situation varies noticeably
• CCC : currently vulnerable and dependent on favorable economic conditions to meet its commitments
• CC : highly vulnerable, very speculative bonds
• C : highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
• CI : past due on interest
• R : under regulatory supervision due to its financial situation
• SD : has selectively defaulted on some obligations
• D : has defaulted on obligations and S&P believes that it will generally default on most or all obligations
• NR : not rated

High Credit Ratings are not as reliable as one might think। Credit ratings of AAA (the highest rating available) were given to large portions of even the riskiest pools of loans. Investors, trusting the low risk profile that AAA implies, loaded up on these CDOs that later became unsellable. Those that could be sold often took staggering losses. For instance, losses on $340.7 million worth of CDOs issued by Credit Suisse Group added up to about $125 million, despite being rated AAA by Standard & Poor's।

Companies pay Standard & Poor's to rate their debt issues। As a result, some critics have contended that Standard & Poor's is beholden to these issuers and that its ratings are not as objective as they should be. Issues as low as “BB” or lower is already in trouble and the public is well aware of their problems. Therefore, an S&P Rating should be more believable. I am sure actor John Wayne would say that a Credit Rating is not half as reliable as a horse.

Back in 2009 when the stock market was at its lowest point in the past 10 years, I bought Ford bonds rated CCC by Standard and Poor’s (S&P) with a yield of 36%। Many people thought that they were going out of business along with the other car companies. But I saw the CEO of Ford Motor Company on C-Span, speaking at a US Senate Hearings. He said that his company was “OK.” He was just there to support the other car companies. So I bought the bonds. Today, their debt is rated CCC but the bonds sell at a premium. Its Credit Company’s debt is a B-. Now the bonds are popular with the investment public. The company is making money again. Soon you will see the bonds rating go up.

Here is why I bought “MOHEGAN TRIBAL GAMING AUTHORITY 6.87500% 02/15/2015 SR SB.” They have holdings in gambling institutions on Native American Reservations. It is rated CCC+ by S&P. I am getting 18.39% Yield to Maturity. But it is only 1.2% of my portfolio. So if something bad should happen and I have to wait to get my money, the event will not devastate my portfolio.